The Federal Deposit Insurance Corporation responded to the troubled economy last year by creating a program designed to increase lending between banks and promote stability following a near shutdown of interbank lending. However, while thousands of financial institutions participate in the program, few are engaging in new interbank lending.
The Temporary Liquidity Guarantee Program, launched in October 2008, includes two components; one guaranteeing senior unsecured debt and a second covering of non-interest-bearing accounts over $250,000 if a bank fails.
Under the program, if a bank defaults on the guaranteed debt or the bank fails, the FDIC must pay any unpaid principal and interest from the debt and all the non-interest-bearing accounts. Such guarantees subsidize banks because they offer a level of protection that makes the debt cheaper than it would be on the open market or if it were backed by private guarantors.
More than 8,000 financial institutions opted into the FDIC program. Despite its initial popularity, however, monthly FDIC reports show that only 101 banks, thrifts, bank holding companies and thrift holding companies have actually issued debt since December 31. More than 80 percent of the debt guaranteed comes from holding companies.
May data from the FDIC show that bank and thrift holding companies comprise most of the guaranteed debt.
In December 2008, Subsidyscope filed a Freedom of Information Act request for the names of all the banks participating in the program and the amount of debt guaranteed. The FDIC provided a list of names but denied the amounts on grounds that such information would disclose trade secrets.
Nonetheless, the monthly data released by the FDIC provide a glimpse into the amount of total debt being guaranteed – nearly $346 billion as of the end of May 2009. The total amount of debt that could be guaranteed under the first component of the program is $785 billion. Data from the FDIC Quarterly Banking Profile show that in the first quarter of 2009, non-interest-bearing accounts guaranteed under the TLGP program totaled $700 billion.
The latest TLGP report shows a breakdown of the amount of guranteed debt by institutions and bank and thrift holding companies in relation to the total amount that can be guaranteed.
FDIC data also show that nearly 69 percent of the debt guaranteed is composed of medium term notes, which mature anywhere from nine months to 10 years. This is to be expected, given that the TLGP program is only for debt that matures in three years – by the end of 2012. Commercial paper makes up another chunk, 20 percent, of the senior unsecured debt.
To participate in the program, a financial institution must pay a fee that would cover any defaults in the event the institution failed. The latest report shows that the FDIC has collected $8 billion in such fees. After the program ends, if there are no losses to the TLGP fund, the money will be shifted into the Deposit Insurance Fund, which covers deposits lost due to bank failures.
As of April, the FDIC also assessed surcharges for certain guaranteed debt. These surcharges go to the Deposit Insurance Fund. The aim is to boost the fund, which has been severely depleted since early 2008 following a rapid number of bank failures.
Of the 37 banks that failed in 2009, 29 participated in the debt guarantee option of the Temporary Liquidity Guarantee Program, and 34 in the portion of the program that backs non-interest bearing accounts.
In April, FDIC Chairman Sheila Bair said that there had been no losses to the debt guarantee program, indicating that the banks that failed did not issue debt.
Bair did not address the guaranteed non-interest bearing accounts; however, those accounts at the failed banks totaled $800 million as of May 8, 2009. Of that total, $700 million was associated with one bank, Silverton Bank of Georgia, an FDIC spokesperson said.
Several large banks that have issued debt under TLGP have already begun to issue non-guaranteed debt, indicating that the program may be close to serving out its purpose.
